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China's yuan falls against dollar, helping exporters

July 20, 2018 - 4:21 am

The Associated Press

BEIJING (AP) — China's central bank is allowing its tightly controlled currency to drift lower against the dollar, a move that could help Chinese exporters cope with U.S. tariff hikes but raises the risk of reigniting an outflow of capital Beijing spent months trying to stanch.

On Friday, the yuan dipped to a 12-month low of 6.8 to the dollar, off by 7.6 percent since mid-February.

The slide comes amid a deepening U.S.-Chinese tariff fight that prompted suggestions Beijing might weaken the yuan to help exporters. But financial analysts say while trade tensions rattle investors, the decline has been driven mostly by China's slowing economic growth and the diverging direction of U.S. and Chinese interest rate policy.

Still, a weaker yuan could help Chinese exporters by holding down their prices in dollar terms after Washington's July 6 imposition of 25 percent tariffs on $34 billion of goods from China in a dispute over technology policy.

The decline "does provide a significant offset to the loss in export competitiveness for Chinese exporters," Rajiv Biswas of IHS Markit said in a report Friday.

A continued slide would be a growing concern for competing Asian exporters such as Vietnam, Biswas said. Their goods will become more expensive relative to China's.

The trade dispute has complicated efforts by the People's Bank of China to make the exchange rate system more flexible, market-oriented and efficient.

Over the past three years, Beijing has gradually widened the narrow band in which the yuan is allowed to fluctuate, though regulators intervene regularly to guide its movement. They also have increased the margin by which the state-set daily starting price for trading can be changed.

That allows the central bank to intervene less often, but the currency can fall faster than regulators might want.

The central bank "defended the currency in early July but now it seems gravity is doing its job again as monetary policy diverges further between the U.S. and China," Margaret Yang of CMC Markets said in a report.

The U.S. Federal Reserve is raising interest rates while Beijing eases access to credit to support cooling economic growth. That encourages investors move money out of China in search of higher U.S. returns.

Economists say that while Beijing suppressed the yuan's exchange a decade ago to help exporters, the central bank has intervened over the past three years to keep it in line with a rising dollar. That required it to spend up to tens of billions of dollars a month from Chinese foreign currency reserves.

The yuan's decline looks less dramatic compared with other currencies. It is off just 1.3 percent since March against Europe's euro.

Regulators also want to avoid reigniting fears of a devaluation, which could prompt capital to flee China, pushing up borrowing costs and weighing on economic growth.

Chinese leaders have promised repeatedly to keep the yuan stable but official secrecy fuels investor jitters. The central bank says it bases the yuan's exchange rate on a basket of currencies but has never released details.

Beijing was forced to tighten controls on outbound investment and spend reserves after a change in the exchange rate mechanism in August 2015 prompted fears of a devaluation. Capital outflows spiked to a record $135 billion in December 2015.

The central has plenty of ammunition to defend the yuan, with $3.2 trillion in foreign currency serves at the end of June.